The Council of the EU has published a press release on terms of reference agreed between representatives of EU Member States on the applicable rules on addressing capital shortfalls and burden sharing.

The terms of reference relate to the outcome of the asset quality reviews (AQR) being conducted by the European Central Bank (ECB) in preparation for the single supervisory mechanism and the EU-wide stress tests being conducted by the European Banking Authority (EBA). The results of the AQR and the stress tests are expected in October 2014.

The terms of reference include the following points:

• any capital shortfalls should first be addressed by private sources;
• if the bank meets any of the early intervention triggers set out in the Bank Recovery and Resolution Directive (BRRD), competent supervisory authorities should require the bank to take initial steps to address any negative results of the AQR or stress test;
• any capital shortfalls identified in the AQR or stress test should be covered within six to nine months, starting from the release of results in October 2014. As Member States are required to apply the BRRD from January 2015, the BRRD should be applicable at the time that any recapitalisation plans have been prepared and analysed;
• any public capital injection will be subject to state aid rules as set out in the 2013 Banking Communication, which requires burden-sharing from shareholders and junior debt holders before any public support is given to an entity; and
• public recapitalisations should be the exception rather than the norm and should only be used when strictly necessary to remedy a serious disturbance in a Member State’s economy and to preserve financial stability. From January 2015, under the BRRD, the use of public funds will imply that a firm is failing or likely to fail, which will usually lead to resolution.

View Terms of Reference – applicable rules on addressing capital shortfalls and burden sharing in the context of the Asset Quality Reviews and Stress Tests, 8 July 2014